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Shale Boom Changes Way U.S. Gas Traders Buy and Sell

(Bloomberg) -- North American natural gas bets are moving closer to the nerve centers of the shale boom in the U.S. East.

In a ranking of the gas hubs with the largest physical trading volumes, Louisiana’s Henry Hub -- the benchmark for U.S. gas futures -- has fallen to 38th place this year after being third just eight years ago. Instead, points in western Pennsylvania and the Southeast, nearer to the prolific Marcellus Shale basin, are becoming the go-to spots for pricing gas.

As gas markets get more volatile -- the futures contract based on Henry Hub moved as much as 8.9 percent Monday, the most since January -- traders are increasingly looking at other options to bet on regional pricing differences. It’s another effect of the waning role of production from the Gulf Coast, once the heart of U.S. production, as output in Appalachia and the Permian Basin soars.

While it’s still “wildly successful” as a futures contract, traders have been expressing “frustration with Henry Hub because they felt like it doesn’t reflect some of the spot market volatility,” said Mark Callahan, editorial director of Americas generating fuels and power pricing at S&P Global Platts in Houston.

This past winter was an example of the kind of dramatic price spikes that can roil regional gas markets in the colder months. New York City gas jumped to more than $140 on Jan. 4, while Henry Hub spot prices settled at $2.88. The new Northeast regional index would have jumped to $22.15.

The Dominion South Point hub in western Pennsylvania -- home to the Marcellus basin, the biggest U.S. shale play -- is among the top three physically traded gas hubs by volume this year, according to Intercontinental Exchange Inc. Transco Zone 4, the price for gas delivered to the Southeast on a massive interstate pipeline, was the most popular.

To reflect the gas trading shift, Intercontinental Exchange and S&P Global Platts have introduced regional indexes that price the fuel based on the biggest pipeline flows, including Transco 4 in the Southeast and Marcellus receipt points in the Northeast.

That doesn’t mean Henry Hub is going away. It still ranks first globally among the most actively traded gas futures contracts, according to CME Group and Intercontinental Exchange.

The Platts-ICE Natural Gas Index Americas include the Northeast, South, Midwest and West and a composite for North America. Each of the regions is made up of the five biggest flow points based on seasonal trends.

“The real advantage to using flow data is that it really allow these indices to really reflect the seasonality we see in natural gas in terms of supply and demand,” Callahan said.